If you can, take some lacquer thinner, some good wire brushes and some paint scrapers and spend some time cleaning up around the valves and between the valves and the bores. Get it down to bare base iron and as clean as possible. Then use a really bright light and even a magnifying glass to visually inspect these areas for any signs of cracks.
Also, look at all the intake ports and intake valves - see any sign of water having sat in them?
I've found a lot of cracked engines in this manner.
Also, work a deal with the seller - if the engine checks out good at the machine shop (is a usable core), then "Price X", if it ends up being cracked and the block is bad, then maybe he gives you 1/2 the price back (meets you half way).
Option A: For a core engine like this - I'd probably pay a couple hundred bucks max! ($200 - 250). But, if he won't do the "1/2 back if it's bad deal" - then it is only worth half that to me - $100 to $125 . . . take it or leave it. This is because you have to do all the hard work to take it apart, have it cleaned, magged, pressure tested, etc.. All the risk is on you.
Option B: The only way it becomes a $500 engine to me is if he is willing to split the costs for hot tanking, magnafluxing and pressure testing. If AFTER that, it is good and he's split the costs with me, then he gets $500 . . . if it is bad, nothing.
Dale